Question

1. Set up an amortization schedule for a $30,000 loan to be repaid in equal instalments at the end of each of the next 3 years. The interest rate is 3 percent, compounded annually.

   A. What percentage of the payment represents interest payment and what percentage of the payment represents principal payment for each of the 3 years?B.Why do these percentages change over time?

Answer 1

	we have to compute first equal annual installment
	we have to use financial calculator to solve this problem
	Put in calculator
	PV	-30000
	FV	0
	I	3%
	N	3
	Compute PMT	$10,605.91
	year	Beginning balance	Interest	installment	Ending balance
	0				30,000
	1	30,000	900	(10,606)	20,294
	2	20,294	609	(10,606)	10,297
	3	10,297	309	(10,606)	-
			1,818	(31,818)
Answer A)		i	ii	iii=ii-i	iv=i/ii	v=iii/ii
		Interest	Installment	Principle	Interest as % of total payment	Principal as % of total payment
	1	900	10,606	9,706	8.49%	91.51%
	2	609	10,606	9,997	5.74%	94.26%
	3	309	10,606	10,297	2.91%	97.09%
	Reason for change in %- At the starting of the year we will have higher amount outstanding and because of this interest will be higher.
	As we pay installment next year principal amount will be lower and will attact lower interest amount.
	That is why interest % will keep reducing and principal amount will increase as we move toward the maturity period of loan.